One of the key aspects to building a portfolio of funds is diversification as while it may feel fantastic to see all your holdings making money at the same time, the chances are that they will all fall together as well.
As a result of that, the FE Research team has included funds within sectors or asset classes that are massively en vogue at the moment – such as the likes of Trojan Income, BlackRock Continental European Income and CF Lindsell Train UK Equity – as well as portfolios that focus on very out of favour areas of the market.
One of the best examples at this point in time is in the commodities/natural resources space, where the team is recommending a variety of funds which buy stocks in the bombed out area.
There is no denying that mining, raw materials and energy have been hugely unpopular over recent years as a result of the end of the so-called ‘commodity super-cycle’, slowing economic growth in China and poor decision-making on the part of company management teams.
According to FE Analytics, the likes of the MSCI AC World Energy, Material and Metals & Mining indices have all considerably underperformed the wider global equity market over the past five years.
Performance of indices over 5yrs
Source: FE Analytics
While valuations are cheap, many experts – such as Apollo’s Ryan Hughes – think that now is too early to buy into the asset class given the clear headwinds still facing the sectors.
Nevertheless, taking a contrarian approach to investing has been a very successful strategy over the long term and if investors want to buy while others are fearful, here we highlight FE Research’s top three commodity-related funds.
BlackRock Natural Resources Growth & Income
One of the highest-rated funds is BlackRock Natural Resources Growth & Income, which carries five FE Crowns and is headed up by Josh Freedman, Tom Holl and Desmond Cheung.
As its name suggests, the fund is income orientated which – along with Freedman, Holl and Cheung’s stock-picking abilities – has meant the fund has given investors a far smoother ride than many of its peers over recent years.
According to FE Analytics, the £35m fund has lost 16.31 per cent since its launch in May 2011 while the average IA Natural Resources fund is down a hefty 36.48 per cent.
Performance of fund versus composite portfolio since launch
Source: FE Analytics
The FE Research team likes the fund due to the managers’ strategy. The managers start by making top-down sector calls, then allocate to individual companies after their bottom-up analysis. All told, they say it is one of the best ways to gain exposure to the asset class.
“We particularly like the portfolio construction part of the process, as it keeps the number of stocks to a minimum and assures every company makes a meaningful contribution to the overall performance,” they said.
“This concentration could be double-edged, though, because any issue with a single share will have an equally large impact. The income part of the fund is boosted by the limited use of call options on stocks it holds.”
BlackRock Natural Resources Growth & Income is currently overweight agriculture and narrowly underweight mining and energy. It also holds 5 per cent in cash. The fund yields more than 4 per cent and has a clean ongoing charges figure (OCF) of 0.98 per cent.
Sticking with BlackRock and the FE Research team thinks the group’s well-respected Gold & General fund is the best way to gain access to miners of the precious metal.
The gold price has seemingly been in freefall since its peak in September 2011 as a result of improving economic data, increased appetite for risk among investors, falling inflation expectations and the fact the commodity offers no income.
Thanks to the asset class’ higher beta characteristics, gold mining equities have had an even more torrid time though.
Nevertheless, with valuations at rock-bottom levels and sentiment towards the sector at an all-time low, now may be an attractive time to look at the asset class and the team thinks Evy Hambro’s fund is the best out there.
“BlackRock has a long track record of investing in natural resources and the group’s reputation in this area means the fund has excellent access to company directors. The team also has the background required to understand the different business models of mining companies,” it said.
“It is well ahead of many other gold funds in terms of performance and it has also taken on less risk. The fund would be well suited to an equity portfolio, as performance between this asset class and gold has shown little correlation over long periods of time.”
Hambro has been at the helm since April 2009, over which time the five crown-rated fund has lost 36.33 per cent and beaten its FTSE Gold Mines benchmark by more than 20 percentage points.
Performance of fund versus index since April 2009
Source: FE Analytics
The £860m is also beating its benchmark and the average IA gold equities fund over one, three and five years.
BlackRock Gold & General has a bias to mid and small-caps and has an OCF of 1.17 per cent.
Allianz Global Agricultural Trends
The final fund on the list focuses on an even more niche area of the market: Allianz Global Agricultural Trends, which is five crown-rated and helmed by FE Alpha Manager Bryan Agbabian.
The £152m fund aims to profit from long-term imbalances in supply and demand across agricultural production, from farms to supermarkets and is rated by FE Research due to Agbabian’s process, which means the portfolio can see gains from both rising and falling agricultural commodity prices.
It is of course a very specialist fund, but the team says it can make a good inclusion to any portfolio as it offers alternative exposure to global equity markets or even to emerging markets.
“Agbabian designed an interesting approach to investing in agriculture, using a safer route than directly investing in commodities.”
“It does not require investors to have a positive view on commodity prices as the fund should be able to benefit from both a rising and declining environment. In addition to profiting from the frequent supply and demand imbalances in the sector, the fund also offers an uncorrelated approach to global equity markets.”
They added: “This is a niche market but Agbabian has the expertise and a suitable approach to get the best out of it.”
According to FE Analytics, Allianz Global Agricultural Trends has returned 46.19 per cent since its launch in August 2008. As a point of comparison, the S&P GSCI Agricultural index has lost 36.49 per cent over that time.
Performance of sector and index since launch
Source: FE Analytics
The fund's holdings are concentrated in global equity markets, focusing on companies that participate in the raw materials production or product processing & distribution sectors. Its largest sector weightings are speciality foods, meat, poultry & fish and speciality chemicals.
Its OCF is 1.13 per cent.
